Tax credit mistakes cost Joe Public £1bn a year

Taxing Peter to overpay Paul

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Updated Fraud and error in the tax credits system is costing the UK economy at least £1bn a year, according to MPs.

The Commons public accounts committee criticised HM Revenue and Customs (HMRC) for failing to establish an adequate program for overpayment reduction, with definite targets, despite frequent criticism over the losses. "The tax credits situation is as serious as ever," PAC chairman Edward Leigh said. "HMRC's attempts to bring the system under any measure of control have so far not been crowned with conspicuous success."

A report (pdf) by the committee estimates £6bn on over-payments out of the £65bn paid out by the tax credit system in the three years from the introduction of the scheme in 2003. HMRC had clawed back £2bn of the over-payments and written off £700m by the end of last year. Of the remaining £3.3bn yet to be collected, as much as £1.6bn is unlikely to be repaid, according to MPs.

Opposition MPs criticised the tax credit system, which is designed to benefit working families, as overly complex.

EDS compo slows to a crawl

The report adds that HMRC is considering suing IT contractor EDS over computing problems involving the tax credit system. EDS agreed to stump up £71.25m in compensation in November 2005 over failures in the computing system it supplied to support the tax credit system. The compensation package is partially dependent on EDS winning new business from government. EDS has been less successful of late in winning government contracts, to the point where it might take a whopping 106 years to complete compensation payments, The Guardianreports.

HMRC said it pushing EDS for early payment of the compensation, reserving the option to take the IT giant back to court if necessary. "HMRC has already told EDS that the rate of payments must be accelerated and is discussing steps with them to achieve this. HMRC remains determined to be paid in full, and will go back to court if necessary," HMRC said in a statement.

"Any bids by EDS for further contracts with the UK Government would be considered through the usual EU procurement processes. Payment of settlement figure is not dependent on new work given to EDS by HMRC," it added.

Ghost in the machine

Meanwhile, problems with the tax credit system remain. An estimated 1.9m families end up receiving tax credit over-payments each year, more than double the 750,000 margin for over-payment error anticipated when the scheme was introduced. Awards under the scheme are made for a full year, initially on provisional data. If a claimant's circumstances change during the course of a year, then the awarded amount may be wrong.

The process means some overpayments are inevitable but their current level, along with the administrative costs of running the scheme, estimated at £587m in 2006–07, were criticised in the public accounts committee. HMRC estimates that claimant error and fraud led to incorrect payments of between £1.04bn and £1.30bn in 2004–05 alone.

"There is little evidence the Department has the scheme under control," the public accounts committee report said. "Many claimants continue to struggle to understand tax credits and why they are overpaid. There have been many complaints about the process for recovering overpayments and the Ombudsman continues to receive and to uphold a large number of complaints."

"Tax credits continue to suffer from the highest rates of error and fraud in central government," it added.

MPs on the committee are calling for HMRC to report on when it expects to reach published targets of reducing tax credit overpayment by a third.

An HMRC spokesman said that it has addressed MPs' criticism with measures designed to reduce the overpayment of tax credits. Policy changes designed to tighten up the scheme were introduced in the 2005 pre-budget report.

"This report relies on data captured only up to 2006. As a result of a series of improvements overpayments have fallen by a fifth and accuracy in processing payments has reached 97 per cent. HMRC’s security measures stopped the vast majority of fraudulent claims before any money was paid out," a HMRC statement on the report said.

"Tax credits provide support to 6 million families and have been central in lifting 600,000 children out of poverty since 1997. They have also improved work incentives and reduced the tax burden on low to middle income families, so that three million families pay no net tax at all," it added. ®